What are a bank's obligations to its customers?

Relationship between the bank and the customer

The general relationship between a bank and the customer is a contractual one which begins when an account is opened. The contract specifies the obligations imposed on the bank and the customer, although some obligations may be agreed on at a later stage.

The bank becomes a debtor of the customer when the customer deposits money in a bank account. Money paid into a bank account becomes the property of the bank and bank can use the money as it sees fit. It is not obliged to tell the customer how the funds will be used, but it must repay the money on demand.

If a bank lends money to a customer, the bank becomes a creditor of the customer and the customer becomes a debtor of the bank.

Obligations of the bank

The Financial Conduct Authority’s Banking Conduct of Business Sourcebook (BCOBS) contains rules and guidance on communications with customers and financial promotions; information to be made available to customers, including statements of account; post sale requirements on prompt, efficient and fair service, moving accounts and lost and dormant accounts; unauthorised and incorrectly executed payments; and cancellation rights and their effects. Some of the main provisions of BCOBS are:

  • A bank must pay due regard to the interests of its customers and treat them fairly.
  • Banks must consider the information needs of its clients and communicate information to them in a way which is clear, fair and not misleading.
  • The customer should be told of any disadvantageous change, of a material nature, to the interest rate that applies to their account before the change comes into force.
  • Pre-sale information for products and services should generally refer to the availability of similar products and services offered by the bank that the customer may be interested in.
  • Before entering into a contract, joint account customers should be told of their rights and duties and the concept of joint and several liability. Customers should be informed what this means if the relationship with the other joint account holder ends.
  • Customers should be given details of the charges that apply for the normal running of an account before the contract is entered into. A warning that the charges may change in the future should also be included.
  • If a disadvantageous change to the level of charges is made, the customer should be informed at least 30 days before the change comes into force.
  • Once a contract has been entered into, a bank must provide a service which is prompt, efficient and fair. This includes requirements, for example, to have effective systems in place to allow customers to report thefts or losses, to provide a prompt and efficient service to allow customers to switch bank accounts, and to consider any apparent cases of customer financial difficulty sympathetically and positively.
  • A customer has a right to cancel a contract for a retail banking service (including a cash deposit ISA) without penalty and without giving any reason, within 14 calendar days.

Implied terms of the contract and duties between the bank and the customer

An implied term of the contract between the bank and its customers is that it will keep its customers’ information confidential. Following the case of Tournier v National Provincial and Union Bank of England (1924), a bank can only legally disclose information about its customer if:

  • it is compelled to do so by law;
  • it has a public duty to do so;
  • the bank’s own interests require disclosure;
  • the customer agrees to the information being disclosed.

The bank will generally be liable for losses that it could reasonably have foreseen when it disclosed the information.

Duties owed by the customer to the bank

A customer has a duty to notify the bank of any unauthorised operations on the account. The knowledge of forgery the customer has must be actual and not just constructive (Greenwood v Martin’s Bank [1933]). A customer must also exercise reasonable care when drawing cheques or other payment orders so that the bank is not misled (London Joint Stock Bank ltd v Macmillan [1918]).

Under the Payment Services Regulations 2009, a customer is liable for all losses arising from the unauthorised use of a ‘payment instrument’ if they have intentionally or with ‘gross negligence’ failed to comply with their statutory obligations. This would include failing to comply with the terms and conditions of the use of the payment instrument, failing to notify the bank without ‘undue delay’ of its loss, theft, or unauthorised use, or failing to take reasonable steps to keep the security features of the payment instrument safe. Banks should specify the steps they expect customers to take in their pre-contract information. The Financial Conduct Authority has indicated that a contractual term which bans the customer from writing down or recording a password or PIN goes beyond ‘reasonable steps’ and is unlikely to be enforceable. If the customer isn’t to blame for the loss, they can only be held liable for the first £50 of the loss.

Business days and hours

It is an implied term that the bank will be open for business on particular days. Normally, these are Monday to Friday except for bank holidays, or if there was a variation in the contract in relation to open days and subject to reasonable notice if the business closes. Each bank sets its own hours of business.